The results are on the basis of a study which examined data dating back to 1998. It looked at monthly returns of 145 mergers and 131 acquisitions between 1998 and 2010, with returns being calculated over a three-year period post the deal (up to 2013).
“Before acquisition, the acquiring companies generated.. lower returns… (but)…their financial performance improved substantially after the merger...(and)…generated excess returns…compared to the returns generated by these benchmark companies. This shows that the Indian acquiring companies have been able to realise synergy from the mergers,” said the study authored by Pitabas Mohanty Professor of Finance at XLRI Jamshedpur and Supriti Mishra Associate Professor of Strategy at IMI Bhubaneswar.
The findings are part of a National Stock Exchange working paper entitled ‘Run-up in Stock Prices Prior to Merger & Acquisitions Announcements: Evidence from India.’
It found that mostly poor performing companies go for mergers and acquisitions. The study looked at acquisitions funded by cash and also by stock. The former underperformed by 1.63% in the 36-month period before the announcement of the acquisition, while the latter underperformed by negative 1.07% excess returns in the same time period. They outperformed following the deals.
Interestingly, the study also found that the merged companies tend to show a spike in share price before the deal happens.
“The increase in stock price witnessed prior to a merger could reflect insider trading of the stocks. It is, however, not very clear why this run-up is witnessed only for the merged companies and not for the acquiring companies,” it said.